Unutilised ITC refund claims across tax periods: rejection based on Accounting Standard 10 beyond SCN set aside as void

The dominant issue was whether the tax authority could deny refund of unutilised ITC for specific tax periods on grounds not confined to the SCN, particularly by relying on alleged non-capitalisation under Accounting Standard 10. The HC held that adjudication must remain within the SCN's allegations; any order travelling beyond the SCN violates natural justice and is void, and inconsistent treatment of identical refund claims across periods is arbitrary and contrary to the principle of consistency, notwithstanding that res judicata does not strictly apply in taxation. Consequently, the impugned refund-rejection orders were quashed by certiorari and the writ petition was allowed.

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Issues Involved:
1. Inconsistent approach by the Department in dealing with refund applications.
2. Department's deviation from the scope of show cause notices.
3. Distinction between inputs and capital goods under the CGST Act, 2017.

Summary of Judgment:

Inconsistent Approach by the Department:
The Petitioner argued that the Department adopted an inconsistent approach in dealing with refund applications, despite similar facts and circumstances. The Court agreed, noting that refund claims for previous and subsequent periods were sanctioned, but claims for July-September 2019 and October-December 2019 were withheld without valid justification. The principle of consistency dictates uniform treatment under similar factual and legal circumstances, and the Department's actions lacked cogent rationale, leading to perceptions of unfairness and arbitrary decision-making.

Department's Deviation from the Scope of Show Cause Notices:
The Petitioner contended that the Department exceeded the scope of show cause notices by introducing new grounds during adjudication. The Court emphasized that any action beyond the specific allegations in the show cause notice violates principles of natural justice. The Department's actions in this case were deemed impermissible, as they expanded the scope of inquiry without providing the Petitioner a fair opportunity to respond, thus undermining the integrity of the adjudicatory process.

Distinction Between Inputs and Capital Goods:
The Petitioner argued that specific goods used for R&D, software development, and validation were not capitalized in the books of account and should be treated as inputs under the CGST Act, 2017. The Court agreed, stating that the distinction between inputs and capital goods lies in whether the goods are capitalized. Since the specific goods were not capitalized and were essential for providing IT services, they qualify as inputs. The Court also referenced the Supreme Court's decision in Tata Engineering & Locomotive Company, which supports the classification of essential goods as inputs.

Conclusion:
The Court found the impugned orders dated October 25, 2021, and February 24, 2023, to be erroneous and inconsistent with established principles. The orders were quashed, and the writ petitions were allowed, with consequential reliefs to follow. The judgment underscores the importance of consistency, adherence to the scope of show cause notices, and the correct classification of goods under the CGST Act, 2017.

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